This page has been archived and commenting is disabled.
The Long View: Is The Bull Market In Bonds Almost Over?
Submitted by Lance Roberts via STA Wealth Management,
There has been much debate about the current low levels of interest rates in the economy today. The primary argument is that the "30-year bull market in bonds", due to consistently falling interest rates, must be near its end. Of course, this debate has devastated the "bond bears" who have consistently been frustrated by lower interest rates despite their annual predictions to the contrary. However, just because interest rates are currently low, does this necessarily mean that they must rise?
The chart below shows a VERY long view of interest rates (equivalent rates to the Federal Funds Rate and 10-year Treasury) back to 1854.
While there is much data contained in the chart above, there are a couple of important points to consider in this debate. The first is that interest rates are a function of the general trend of economic growth and inflation. Stronger rates of growth and inflation allow for higher borrowing costs to be charged within the economy. As shown, interest rates have risen during three previous periods in history; during the economic/inflationary spike in early 1860's, again just prior to 1920 and during the prolonged manufacturing cycle in the 1950-60's following the end of WWII. Secondly, interest rates tend to fall for very extended periods.
However, notice that interest rates fell during the depression era, even though, economic growth and inflationary pressures were robust. This was due to the very lopsided nature of the economy at that time; the wealthy prospered while the middle class suffered, which did not allow money to flow through the system (monetary velocity).
Currently, the economy is once again bifurcated. The upper 10% of the economy is doing well while the lower 90% remain affected by high levels of joblessness, stagnant wage growth and a low demand for credit. For only the second time in history, short term rates are at zero and monetary velocity is non-existent. The difference is that during the "Great Depression" economic growth and inflationary pressures were at some of the highest levels in history, while today the economy struggles along at just above a 2% rate with inflationary pressures running lower than that.
Let's look at the fall of interest rates since the 1980's in a slightly different manner.
As stated above, since interest rates are ultimately a reflection of economic growth, inflation, and monetary velocity, the fact that the globe is awash in deflation, caused by weak economic output and exceedingly low levels of monetary velocity, there is no pressure to push rates higher. In fact, interest rates in the U.S. continue to fall as money is fleeing other countries and associated risk for safety. Let's take a look at the chart of 10-year equivalent treasury rates once again. The dashed black line is the median interest rate during the entire period.
(Note: Notice that a period of sustained low interest rates below the long-term median, as shown in the chart above, averaged roughly 40 years during both previous periods. We are only currently 4-years into the current secular period of sub-median interest rates.)
As shown, there have been two previous periods in history that have had the necessary ingredients to support rising interest rates. The first was during the turn of the previous century as the country became more accessible via railroads and automobiles, production ramped up for World War I and America began the shift from an agricultural to industrial economy.
The second period occurred post-World War II as America became the "last man standing" as France, England, Russia, Germany, Poland, Japan and others were left devastated. It was here that America found its strongest run of economic growth in it history as the "boys of war" returned home to start rebuilding the countries that they had just destroyed. But that was just the start of it as innovations leapt forward as all eyes turned toward the moon.
Today, the U.S. is no longer the manufacturing epicenter of the world. Labor and capital flows to the lowest cost providers so that inflation is effectively exported from the U.S. and deflation can be imported. Technology and productivity increases suppress the need for labor and wages which has continued to growth rates over time. The chart below shows this dynamic change that begin in 1980. A surge in consumer debt was the offset between lower rates of economic growth and incomes in order to maintain the "American lifestyle."
Today, the number of workers between the ages of 16 and 54 is at the lowest level relative to that age group since 1976. As discussed recently, this is a structural problem that continues to drag on economic growth as nearly 1/4th of the American population is now dependent on some form of governmental assistance.
Currently, there are few economic tailwinds prevalent that could sustain a move higher in interest rates. The reason is that higher interest reduces the flow of capital within the economy. For an economy that remains dependent on the generosity of Central Bankers, rising rates are not the outcome that "stock market bulls" want.
The problem with most of the forecasts for the end of the bond bubble is the assumption that we are only talking about the isolated case of a shifting of asset classes between stocks and bonds. However, the issue of rising borrowing costs spreads through the entire financial ecosystem like a virus. The rise and fall of stock prices have very little to do with the average American and their participation in the domestic economy. Interest rates, however, are an entirely different matter.
While there is not much downside left for interest rates to fall in the current environment, there is also not a tremendous amount of room for increases. Since interest rates affects "payments," increases in rates quickly have negative impacts on consumption, housing, and investment.
This idea suggests is that there is one other possibility that the majority of analysts and economists ignore which I call the "Japan Syndrome."
Japan is has been fighting many of the same issues for the past two decades. The "Japan Syndrome" suggests that while interest rates are near lows it is more likely a reflection of the real levels of economic growth, deflation and weak wages. If that is true, then it is also likely true for the U.S. which suffers from similar economic drags. This also suggests that rates are most likely "fairly valued" and implies that the U.S. could remain trapped within the current trading range for years as the economy continues to "muddle" along.
Will the "bond bull" market eventually come to an end? Yes, eventually. However, the catalysts needed to create the type of economic growth required to drive interest rates substantially higher, as we saw previous to 1980, are simply not available today. This will likely be the case for many years to come as the Fed, and the administration, come to the inevitable conclusion that we are now caught in a "liquidity trap" along with the bulk of developed countries.
»
- 9546 reads
- Printer-friendly version
- Send to friend
- advertisements -
No.
There is nothing normal about negative interest rates.
This is a rape of the markets for the benefit of banksters and the government. Dressing it in Keynesian prose only shows the author's ignorance.
Perhaps the author could simply acknowledge that negative rates exist then..and then try and explain that existence.
Then at least we can all debate reality for a moment instead of The Lance Roberts Fantasy Factory.
They exist because they do. It is what it is.
Better try to figure out what causes them as opposed to "justifying" such.
Try deflation, Liquidity Trap and risk premia
And By the Way, rates are low and headed lower by the bond vigilantes. In spite of what the goobermint apparently wants, higher rates via higher inflaiton, just won't and ain't gonna happen.
We're in a Liquidity trap which is a monetary phenomenon caused by non-monetary factors.
knukles gets a gold star.
No Government that I am aware of wants negative rates.
The whole purpose of printing money was to create inflation...and hence "spread product" (borrow short to lend long.). What I in fact see seems to be a monumental failure of Government.
How could anyone else not see it differently?
Watchu mean? If theTtreasury issues Direct Obligations of the US Treasury at negative interest rate, they get paid by the holder to issue the debt.
Interest payments become interest income.
Voila! The deficit becomes self-liquidating.
Now, go imagine what they can do with issuing infinite amounts of debt upon which they get paid.
Socialist Commie Own Everything Deluxe.
Is The Bull Market In Bonds Almost Over?
In a word: "No."
I agree with you, although alot of people lhave lost money in here listening to other BEARISH zero hedgers
I listen to this guy from OZ ==> http://bit.ly/1fMcakI as his calls are very accurate.
I think with the ECB, they are getting more traders short, and will rip their tits off , with some positive spin soon.
Just feels like something is fishy is going on here, the same as it ever was.
I was going to give it a poor rating because he failed to identify interest rates as an indicator of risk. The whole thing smacks of 'interest rates are set by tptb' and are not affected by risk. Then in the last sentence he did mention liquidity trap so I decided to rate it as ok.
His arguments weren't convincing, and although I think it's important to look at historical data the situation is not the same, we've never been here before.
What if what you are seeing is what you are "feeling"?
An " absurdity."
"Funny Money."
Psycho money fer sure...but so was World War II.
Why do so many analysts depend upon history for comparisons when clearly "We the People" (and the rest of the world for that matter) have never ever been here before?
Its like a rubber dinghy sailor going around Cape Horn using his old pond charts for fucks sakes.
"Verja dey."
That feeling...
That you have never been here before..
The "bond vigilantes" are at the bottom of the Mariana Trench (deepest part of any ocean on Earth).
One day they will rise up outa the great pumpkin patch looking like Freddy Krugman
I keep thinking the Dancing Zombies in that Michael Jackson video myself.
ROTFLMFAO! 10's {puke-up} 15 or 20 BPS on Jawboning from the ECB and a guy from Omaha, and bonds are passe'.
What part of "slow down, "et.al; deflation" have you wannabe bond vigilantes missed?
This whole shitshow is about to tear itself apart at the seams... The volatility across the board is picking up/ Bitchez
Yet the VIX is trading the 18 handle. lol!
Did that worthless turd Bullard write/ submit this piece? Fire up those printing presses Mr. Yellen.
Who the hell is going to want to buy government debt?
The only way interest rates will stay low is if the central banks buy ALL of government debt!
This article was bull shit.
Nope. As the world gets more risky, people flock to the least (within risky financial assets) risky assets. Government bonds
Agreed knuks, but I read recently that the Fed already owns almost everything fed.gov from two years on out,
so where do the bidders go next?
Ummmmm That becomes a problem. As in negative rates "to get some", maybe?
LAst data I saw Kaiser was that they owned some 70%? I'm not sure, but the float is getting mighty small. But then again, they've so called stopped the QE, direct buying, no?
I dunno.
Neither does anybody else, so getchur stuff before everybody else wants a piece.
Thanks. I'm sure you'll see the liquidity problems before the rest of us.
Should make for a really bubblicious housing market, for a few weeks, anyway;)
Where do the bidders go next?
See Exters pyramid.
no further down the inverted pyramid is Dollar and at the bottom gold. but with 7 billion on the planet it will never get to gold. for gold to be used we would have to live like Amish pre-industrialization level.
At what price?
Cash money is in fact debt.
If you have none or in fact it suddenly becomes worthless....
Yup. The Vol is the tell. Nothing is stable.
Earnings "as reported" are in fact "forward looking" and indeed...may not exist at all.
Yaz, anyone expecting real GAAP earnings...
well, good luck with that.
No I'm talking about the real thing
CASH FLOW ITSELF CAN BE A FICTION.
You have to be very careful "lending" period here!
Is there even an asset?
Is it worth more than say...ONE DOLLAR????!!!!!
The Japanese deficit for 2015 this year improved is xpected to be 350 bill (37 trill yen) more than total Greek debt...... total issuace 170 trill yen (1.5 trill) for this year alone (includes roll overs) US is the same. The Greek finance minister is bringing reality to bonds watch out. The consensus is slow economy / deflation bonds yileds low (thats Saudis)... The non convention is yield spike purly like what periferial EU had in 2011 in Japan/US on excessive debt levels.. it might not happen but that is against the trend.. long bonds is the consensus...
The cause could be liquidity ie if Greece goes down or there is some shock.. where is the Japanese banks pension liquidity.. (JGB) where is Japan./China/US (everyone else) liquidity . treasuries.. ie if they need to rase cash...look at 2008 tres/JGB collapsed first..
Look at below the bottom graph.. in 1980;s they were issiing 20 trill yen per year (200 bill) 1990's 70tril (700 bill USD) now 2012-15 170 trill (1.7 trill with 100 USD or 1.5 trill with 1.15)
Greece looks good compared to this. thats their own numbers
http://www.mof.go.jp/english/jgbs/debt_management/plan/e20150114referenc...
Did you miss the part about purchasing power for the Japanese?
Japanese Banks and Insurance Companies are defecting the BoJ for "higher yields" abroad.
Why do you think the usd/jpy is trading such a tight range with all the $usd strength? Why do you think usd/jpy has completely diverged from "UST yields" over the last couple of weeks?
If usd/jpy rises any more the "nominal yield" from equities goes negative. The BoJ is taking up slack before JGB yields go Fukushima!
it looks to me like rates went down for 80 years (1854-1934) extrapolating that starting in 1984 that would be, well, after we're mostly all dead bitchez.
thanks for commenting I like your views. See chart JGB have been selling off.. sorry what are you saying you think yen will weaken further to point JGB sell off more, or yen to firm..
http://www.investing.com/rates-bonds/japan-govt.-bond-streaming-chart
Rising "JGB" yields Berry Berry Bad...
I think in the end they have no choice have a JGB crisis .. that causes rates to spike.. then Govt/Boj will have to do something extreme (get the chance) possible BOJ simply says we take 50% of all say 2-30y bonds (bring the defict down to 70-80) and retire the bit taken.. then Gov forced to balance budget (this will give then ability to make deep changes) and then rates will be set higher (so pensions ect can get viable returns
the reason I say that is as this new realistic Greek Govt shows the problem with such high debt.. market players will finally realise that no matter when this ends it will not end with Japan Govt finding the tax revenues (currently 500 bill a year) to pay off 11 trill in debt and rising (with 370 bill defict still) so they need a crisis to get the people to accept the change, weather its tomorrow in 1 year.. but soom the market players will realise the Govt works it out solution is impossible.
so the inflation will pop out eventually..
I just came to read knuckles really.
I happen to think that rates will not rise until after World War III is over.
It will take world war to reflate the economy and build new industries. But during the war, rates will be controlled at low levels - just as they were in WW II.